Following a periodic review, rating agency A.M Best affirmed Assurant Inc.’s (AIZ - Free Report) issuer credit ratings (“ICR”) at ‘bbb’. It also affirmed the ICR and financial strength ratings (“FSR”) of the Property and Casualty (“P&C”) and Life and Health subsidiaries of the company. All the ratings carry a stable outlook.
A.M. Best acknowledges Assurant’s diverse product base and distribution platform, established presence in various niche markets, adequate risk-adjusted capitalization, solid operating earnings, low debt-to-capital ratio and adequate interest coverage ratio. The company has sufficient financial flexibility with a low debt ratio of approximately 18% as of September, 30, 2012. Moreover, it has $350 million in a commercial paper program (100% of which is backed by letters of credit) with no debt obligations until 2014.
The rating agency affirmed the FSR and the ICR of “A” and “a,” respectively, on all the seven Property and Casualty companies of Assurant, backed with a “stable” outlook. It acknowledged the established presence of the business in the North American markets.
The rating agency stated that the company is a leader in rolling out credit-related insurance products, creditor placed hazard insurance, manufactured housing insurance, vehicle service contracts and retail extended service contracts. A.M. Best attributed the strong performance and solid operating earnings of Assurant’s P&C business, over the past five years, to its diverse product line.
The growth in Specialty Property in recent years has nevertheless increased the segment’s exposure to natural catastrophes. Also, the increase in catastrophe retention limit invites further earnings risk. Softness in the Property and Casualty markets is expected to put pressure on premium growth in the near term. The rating agency, however, said that it will monitor the company’s performance in the face of challenging macroeconomic conditions and developments in the mortgage servicing industry.
A.M.Best also affirmed the FSR and ICRs of two other companies that operate within Assurant’s Preneed segment – American Memorial Life Insurance Company (AMLIC) based in Rapid City, SD and Assurant Life of Canada (ALOC) headquartered in Ontario, Canada – at “A-“ and “a-,” respectively, with a “stable” outlook. The rating agency acknowledges AMLIC’s position as the largest writer of preneed solutions in the United States and ALOC’s strong presence in the Canadian preneed market.
Both the entities have grown profitably displaying strong premium growth and at the same time maintaining adequate risk-adjusted capitalization. However, an offsetting factor to the ratings is the ongoing low interest rate environment, given the long-duration nature of the business. Since AMLIC gets all its business from Service Corporation International, there is a chance of concentration risk.
The affirmation of FSR at “A-“ and ICRs at “a-” of Union Security Insurance Company (USIC) – a company that operates within Assurant’s Employee Benefits segment – with a stable outlook comes on the back of its niche position in the U.S. group dental, disability and group life insurance market. The unit primarily serves businesses with less than 500 employees. A weak job market and a high unemployment rate have affected the demand for employee benefits products.
Time Insurance Company (TIC) and John Alden Life Insurance Company (JALIC), both based in Milwaukee, WI, offer individual and small group major medical coverages through Assurant Health. Both these companies also witnessed a rating affirmation – FSR at “A-“ (Excellent) and ICRs at “a-.”
The rating agency acknowledged the fact that the uncertainties pertaining to the implementation of Health Care reform creates a sense of ambiguity, despite the support from the parent. These companies have adopted proactive measures such as reducing expenses, introducing new products and effecting changes in pricing. The extents, to which these measures succeed in mitigating the risks, are yet to be seen.
A.M Best provided the ratings based on an annual review of Assurant’s performance. It had also affirmed the FSR and ICR of the property and casualty and life and health subsidiaries of the company, with a favorable outlook last year. Considering the strong operating fundamentals of the company, it can be assumed that it will gather positive analysis from the rating agency in the next review.
The rating agency may raise its ratings on Assurant if it continues to show a strong operating performance and maintains its strong risk-adjusted capitalization.
However, negative rating actions can not be ruled out in case the balance sheet strength deteriorates to a level, which is below the rating agency’s minimum requirement for the current ratings.
Assurant, which closely competes with Torchmark Corp. (TMK - Free Report) , and Unum Group (UNM - Free Report) , retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.